Hitting the accelerator - Venture Fund Speech
Hon. Pete Hodgson
Thursday, 9 August 2001 Speech Notes
Hitting the accelerator: the Venture Investment Fund and business start-ups
[Address to the IT Investment Forum, organised by the IT Investment Network Ltd, Auckland.]
I’d like to thank the IT Investment Network the invitation to be here. It is very timely.
This government recognises the need to invest in research, science and technology. But we also realise that research in itself is not enough to foster a knowledge economy. We know that New Zealand science is good. But we know also that its commercialisation is poor.
To succeed we need to create an overall environment where innovation can thrive. We have the brains, talent, the education and research organisations, but we haven’t been as successful as we need to be in private sector involvement and commercialisation of our good ideas.
The concern that much of the research and technology generated by our innovation system is not fully exploited - or not exploited at all - has not been unique to New Zealand. In recent years many industrialised countries have implemented policies to enhance innovation and commercialisation. So this Government is not alone in taking steps to speed up the commercialisation of R&D.
Let's take a look at the role of government in this, and what's being done in New Zealand now.
You will be aware of the recent establishment of the New Zealand Venture Investment Fund, which the Government has set up with capital of $100 million from this year's Budget. This money will be used to co-invest with the private sector in seed-stage and start-up New Zealand businesses based on technology or high value-added goods and services.
The aim of the fund is to accelerate the development of the venture capital market in New Zealand. Note that word accelerate, because acceleration is the key idea.
Venture capital has been growing rapidly in New Zealand in the last couple of years or so. At the Knowledge Wave conference last week Scott Perkins of Deutsche Bank estimated the size of the current venture capital pool at $794 million. But there is general agreement that it's still thin at the seed and start-up end of the spectrum.
Given time that problem might have gone away by itself, with no help from the Government, as the venture capital market matured. But the Government wants to accelerate that development, because we don't think there's any time to waste.
Those of you who were at the Knowledge Wave Conference would have seen the formation of a solid consensus that New Zealanders need to develop a greater sense of urgency about lifting our economic performance. We need to hit the accelerator to catch up to the rest of the developed world, which is steadily pulling ahead of us.
One of the recommendations from the conference was to build a larger, more effective venture capital industry. Four specific actions were put forward:
- New Zealand financial institutions to invest 10 percent of their assets in VC
- SOEs to invest 10 percent of their assets in relevant VC industry funds
- Seek increased investment in New Zealand VC from offshore institutions
- Create a VC industry body, led by players with real capital to invest
We in the government are chewing on those recommendations that relate to us. We're looking at how they will inform the draft national innovation strategy put forward to the Prime Minister by the Science and Innovation Advisory Council. We have some digestion to do, and we have started.
In the meantime we're ploughing ahead with the Venture Investment Fund.
By nature it's a temporary step by the Government into the venture capital market. We're in to help kick things along a bit, to help build the capital and more importantly the management expertise the market needs to be stronger at the seed and start-up end. We're in to complement the existing private sector players, not compete with them. And we're in for just a few years, not indefinitely.
The operating model we've chosen is drawn from the private sector. More specifically, we have leant on Israeli thinking and experience.
The VIF will be a fund of funds. It will not be investing directly in New Zealand businesses, but in a series of individual drop-down funds that will be set up over the next year or three.
These drop-downs will be fixed-duration or "closed" funds, operated by contracted private sector fund managers. The VIF contribution will be supplemented with private-sector venture capital and it is these individual funds that will invest directly in New Zealand businesses. A New Zealand business, for these purposes, is one that operates in New Zealand at the time the initial investment is made.
Fund investment charters must specify that initial investments will be in seed-stage and start-up businesses. To spread risk there will be a maximum total investment by an individual fund of no more than 15 per cent of its total capital in an individual business.
Some classes of businesses are excluded from investment, specifically property development, retailing, mining, hospitality-industry businesses, re-investing and re-lending, and businesses associated directly with other investors in the fund or directly with the fund managers. The focus of the fund is on innovative New Zealand businesses developing technology and high value-added products and services.
The VIF will be a minority investor in the individual funds. We're anticipating about five or so of them in the first phase, ranging in size from about NZ$30-NZ$50 million.
Each fund will operate for seven to 10 years before it is terminated and profits are distributed among investors. An individual fund is likely to invest in 15 to 20 enterprises over its lifetime and be actively involved in 8 to 10 enterprises at any particular time.
The VIF is being set up as a distinct entity, administered by the Ministry of Research, Science and Technology. A General Manager is due to be appointed shortly. He or she will manage the VIF with oversight from an Advisory Board drawn from the private sector.
The board will provide the commercial knowledge and judgement VIF needs to operate successfully. Its expertise will be particularly crucial during the set-up phase, when the VIF will be seeking private sector partners to manage the individual investment funds.
Those private sector partners will be sought through a Request for Proposals process. The first RFP is expected to be released in September. If you are interested in receiving this document you may want to register on the VIF website (www.nzvif.com).
Last week I announced the VIF Advisory Board appointments and I’m pleased to say that we’ve achieved an excellent cross section of business, entrepreneurial, research and technology skills.
The Chair is John Grant, an Australian with significant experience in the Australian and international venture capital and investment industry. At the moment John is executive chairman of Australian investment company Grantham Capital, which he founded in 1981 to invest in and provide advice to high-potential, innovative Australian businesses.
John’s public-sector experience includes time as chairman of Australia's Industry Research and Development Board, a statutory authority providing grant funds to promising technology companies, and membership of the steering committee of the Australian Government-sponsored Innovation Summit.
The other members of the board are:
- John Hindmarsh, Auckland City Council treasurer;
- Peter Taylor, company director and chair of HortResearch/Enza joint venture company;
- June McCabe, WestpacTrust chief manager responsible for Government business and corporate strategy;
- Geoff Page, chief executive of Industrial Research;
- Grant Ryan, founder of GlobalBrain and manager of NBCi New Zealand; and
- James Buwalda (ex officio), chief executive of the Ministry of Research, Science and Technology.
The board will have a key role in defining the conditions of the Request for Proposals, assessing the proposals received, selecting fund managers, negotiating specific conditions governing VIF investments in funds, making judgements about the timing of setting up funds, and balancing the government's risk across the portfolio of funds.
By the time fund managers are ready to decide which enterprises or ideas they are ready to invest in, they will be operating two steps away from politics and will be immune from any political influence.
I believe New Zealand has a good base from which to pursue innovation success. New Zealanders are bursting with bright ideas and with great business potential. We possess natural advantages and a can-do attitude that older economies find hard to harness.
But there is much to do. The first change we have to make is to get serious about innovation and succeeding as knowledge-based society. Then we need to take some bold steps. As a government I believe we are providing the right environment to do that. I think the New Zealand Venture investment Fund is, in fact, one of those bold steps.
Government alone can't set the pace. Political leadership is important but business too will have to act to achieve the levels of prosperity that we want as a nation. We must develop more of a culture of innovation and entrepreneurship. Gatherings like this one are an encouraging sign, to me, that something significant indeed is stirring in our country.